Freddie Mac and Fannie Mae and
they’re Role in the Crisis
Fannie Mae or The Federal National Mortgage Association was established in 1938, Freddie Mac or Federal Home Loan Mortgage was made in 1968 “to increase liquidity in the mortgage market” (Fannie Mae & Freddie Mac). What both did was “to provide liquidity to the nation’s mortgage finance system. Fannie and Freddie purchase home loans made by private firms…package those loans into mortgage-backed securities…guarantee the timely payment of principal and interest on those securities to outside investors” (Griffith). So they just made sure that loans that they got wouldn’t be risky of defaults for either the banks or the costumers. For some time since they were created Fannie and Freddie had affected the mortgage market in a positive way by raising the number of homeowners in the U.S. but soon that success would blemished by their poor decisions (Nielsen).The way that they got stuck in this mess and perhaps make it even worse had all started with Wall Street firms. These firms “packaged high- risk loans into securities, got the credit-rating agencies to bless them, and then passed them along to investors… often unaware or misinformed of the underlying risks…the poor performance of the loans in these “private-label securities…not owned or guaranteed by Fannie and Freddie-that lead to the financial meltdown…”(Griffith). With the Wall Street Firms making bigger profits then Fannie and Freddie and they also saw that their market shares were dropping they decided to do the same thing “purchasing and guaranteeing an increasing number of loans and securities with low credit quality” (Nielsen). In the end this really did nothing for them other than to make them lose market shares, to get some of the shares back they made a few more mistakes that would end up costing them dearly. They “began investing in certain subprime securities that credit agencies incorrectly deemed low-risk…also lowered the underwriting standards in their securitization business, purchasing and securitizing so called Alt-A loans…opening the door to fraud” (Griffith). Feeling that if they let Fannie and Freddie sink then the mortgage market would be hit hard the government decided to bail them out. As a result they “cost taxpayers close to $150 billion” (Fannie Mae & Freddie Mac). There has been some controversy that two administrations being Bush’s and Clinton’s had pushed Fannie and Freddie “to increase lending to minorities and low-income home buyers – A policy that necessarily entailed high risks” (Wallison). This turns out to be untrue in “A recent study from the Federal Reserve Bank of St. Louis found that the affordable housing goals had no observable impact on the volume, price, or default rates of subprime loans during the crisis…” (Griffith). Regardless they made really unwise decisions that nearly destroyed their whole business they were just lucky that the government had decided to step in.
Fannie Mae or The Federal National Mortgage Association was established in 1938, Freddie Mac or Federal Home Loan Mortgage was made in 1968 “to increase liquidity in the mortgage market” (Fannie Mae & Freddie Mac). What both did was “to provide liquidity to the nation’s mortgage finance system. Fannie and Freddie purchase home loans made by private firms…package those loans into mortgage-backed securities…guarantee the timely payment of principal and interest on those securities to outside investors” (Griffith). So they just made sure that loans that they got wouldn’t be risky of defaults for either the banks or the costumers. For some time since they were created Fannie and Freddie had affected the mortgage market in a positive way by raising the number of homeowners in the U.S. but soon that success would blemished by their poor decisions (Nielsen).The way that they got stuck in this mess and perhaps make it even worse had all started with Wall Street firms. These firms “packaged high- risk loans into securities, got the credit-rating agencies to bless them, and then passed them along to investors… often unaware or misinformed of the underlying risks…the poor performance of the loans in these “private-label securities…not owned or guaranteed by Fannie and Freddie-that lead to the financial meltdown…”(Griffith). With the Wall Street Firms making bigger profits then Fannie and Freddie and they also saw that their market shares were dropping they decided to do the same thing “purchasing and guaranteeing an increasing number of loans and securities with low credit quality” (Nielsen). In the end this really did nothing for them other than to make them lose market shares, to get some of the shares back they made a few more mistakes that would end up costing them dearly. They “began investing in certain subprime securities that credit agencies incorrectly deemed low-risk…also lowered the underwriting standards in their securitization business, purchasing and securitizing so called Alt-A loans…opening the door to fraud” (Griffith). Feeling that if they let Fannie and Freddie sink then the mortgage market would be hit hard the government decided to bail them out. As a result they “cost taxpayers close to $150 billion” (Fannie Mae & Freddie Mac). There has been some controversy that two administrations being Bush’s and Clinton’s had pushed Fannie and Freddie “to increase lending to minorities and low-income home buyers – A policy that necessarily entailed high risks” (Wallison). This turns out to be untrue in “A recent study from the Federal Reserve Bank of St. Louis found that the affordable housing goals had no observable impact on the volume, price, or default rates of subprime loans during the crisis…” (Griffith). Regardless they made really unwise decisions that nearly destroyed their whole business they were just lucky that the government had decided to step in.